Tariffs Could Just be First Salvo in Readjustment of U.S. Trade Relationships

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There were grand words from German Chancellor Angela Merkel and Chinese President Xi Jinping, the leaders of two of the world’s biggest trading economies, on a call Saturday ahead of a Group of 20 (G20) meeting of finance ministers and central bank governors in Buenos Aires, reported the Financial Times.

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The two recently re-elected leaders have agreed to use “international channels of negotiation to tackle steel overcapacity” following the Trump administration’s decision to impose tariffs on imports of steel and aluminum. Steffen Seibert, a spokesman for the German chancellor, is quoted as saying, “They . . . were in favour of continuing to work on solutions within the framework of the G20. They stressed the importance of close multilateral co-operation in trade in this context.”

Well, they would, wouldn’t they? More than any other two nations in the world, Germany and China have the most to lose from a trade war.

But a followup article makes you wonder if the real objective is not so much steel and aluminium, — which are mostly supplied by Canada and Mexico, both of whom have exemptions — but is rather the opening salvo in a forced re-adjustment of America’s relationship with the world.

President Trump has made no secret of his objection to a number of international issues.

Firstly, the trade deficit the U.S. runs with the world, but particularly with China and Germany.

Secondly, the North American Free Trade Agreement (NAFTA) — although the deficit with Canada and Mexico is a fraction of that, with the ROW aspects of NAFTA irking the president severely, none more so than the perceived loss of manufacturing jobs to Mexico (and to a lesser extent, Canada).

Thirdly, even on the campaign trail Trump was vocal about the failure of many NATO allies to honor pledges to spend 2% of GDP on defense. Ironically, it is not necessarily the poorest countries that are failing to pay their way. The worst offender is Germany, who is by far the wealthiest Eurozone country and has the second-highest GDP in NATO after the U.S.

What started as tariffs on washing machines and solar panels then evolved into tariffs on steel and aluminum (whatever the justifications used, the reality is that Section 232 was a means to an end) is beginning to look like a hard-nosed opening gambit to force trading partners to renegotiate terms of trade more in the U.S.’s favor.

Not that we have any problem with the objective. Germany is a phenomenally wealthy country with an exceptionally high standard of living, not least because since the financial crisis it has manipulated the euro and internal E.U. economic policies to achieve a massive current account surplus of 8% of GDP, driving an E.U. current account surplus of 3.5% of GDP last year, the FT reports.

At the same time, it spends so little on its own defense — 1.2%, according to the World Bank — that it is incapable of transporting its own troops by land or air efficiently or in volume, instead choosing to rely on the security umbrella afforded by the U.S. and fellow NATO members like France, Poland and the U.K.

Germany is not alone in this in Europe. Equally per-capita wealthy countries like the Netherlands are just as guilty and should not be surprised the U.S. has lost patience with partners that run massive trade surpluses yet refuse to pay for their own defense — it is a morally indefensible position.

The Financial Times proposes that this is part of a geopolitical power game. Trump knows steel tariffs are economically counter-productive, but by applying them he will draw an E.U. counterreaction (it has already sharpened Canada and Mexico’s focus at NAFTA talks despite howls of protest that there should be no linkage). When the E.U. retaliates on Harley Davidsons or orange juice, the U.S. will hit back on a big-ticket item, like automobiles.

China’s $350 billion annual trade surplus with the U.S. has become an obsession, yet the objective may not be to simply tariff barrier Chinese exports from U.S. shores as much as force China to agree on reciprocal terms to open markets and respect intellectual property.

It is almost beyond argument that the traditional historical approach of hoping rising living standards in China would open up the economy and political climate to more Western standards and rules has failed. China is arguably more centrally controlled, both economically and culturally, than it was 10 years ago. It continues to rig the game by its own rules and naively hoping things will improve is, it is becoming increasingly apparent, at best a fool’s errand.

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President Trump’s approach is high-risk, damaging to relationships with friends and adversaries, undiplomatic and arguably unbecoming of the world’s bastion of democracy and free trade – but it may yet prove effective where history has been littered with failures.

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